Germany needs to hear the truth about the euro

This week’s historic ruling from the German constitutional court is a tale of three cities: Karlsruhe, Luxembourg and Frankfurt. Like many a Dickens novel, it is an overlong, episodic and melodramatic drama. If they were being paid by the word, as was the case with Dickens, the ruling’s authors could retire now as millionaires.

Instead Prof Andreas Vosskuhle (actually Voßkuhle) retired as constitutional court president on Tuesday with a comfortable pension and a final ruling that, depending on your outlook, was either a parting shot at a rival court, an overdue pushback against the EU democratic deficit, or an incendiary time-bomb under European integration.

Germany may be the foundation stone of European integration but its constitutional court in Karlsruhe (BVG), the country’s highest legal instance, has always had a tricky relationship with the even higher instance in Luxembourg.

For years ECB officials have watched in frustrated silence as successive German governments took credit for the thriving economy and export market – without pointing out the key contribution of a stable single currency

Knowing the Court of Justice of the European Union (CJEU) is the final word in EU affairs sticks in the craw of many German jurists. And many crowed with delight this week as Karlsruhe moved to have the last word on bond-buying by the European Central Bank (ECB).

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The Public Sector Purchase Programme (PSPP) is part of a broader ECB bond-buying programme launched by the Frankfurt bank as part of Mario Draghi’s (in)famous “whatever it takes” promise in 2012 to save the common currency.

More than €2.1 trillion in government bonds and other securities were purchased as part of PSPP, a programme reactivated last November as the euro faced a squeeze from Brexit and trade conflicts.

German complainants to Karlsruhe argued that ECB bond market interventions – ostensibly to stabilise the euro and keep inflation, as mandated, close to 2 per cent – veered from monetary into economic policy. Put simply: to save the euro, German critics believe the currency’s central bank is breaking EU rules.

Leaving aside many Germans’ fears that these bonds will eventually be worthless, the complainants in Karlsruhe said the ECB had not heeded the side-effects of its interventions; from low-interest savings nibbled away by inflation to a flight from pension and life insurance funds into property, creating a price bubble.

Agreed with the critics

During the initial hearing the Karlsruhe judges surprised some observers by indicating they agreed with the critics. They then referred the case to the CJEU, the guardian of the EU treaties in Luxembourg. They ruled that PSPP adhered to EU law and sent the case back to Karlsruhe.

On Tuesday the German court in turn ruled that ECB bond-buying carried no evidence of illegal monetary financing while siding, in part at least, with bond-buying opponents.

Germany’s highest court couldn’t stop the bond-buying programmes directly, as it has no legal competence over the ECB, and threatened instead to remove the ECB’s biggest building block, the Bundesbank.

Germany has the euro area’s largest population and economy and holds the largest share – 18.4 per cent – of ECB stock. By extension Germany also holds the largest share of bonds bought via PSPP.

The German court’s solution to the stand-off is to demand greater insights into ECB decision-making.

In the next three months, the federal government and MPs in the Bundestag should study the ECB’s justifications for bond-buying or else the Bundesbank – no fan of bond-buying – should be prohibited from further participation.

Legal paradox

Many legal minds are scratching their heads at the ruling’s legal paradox: it warns the ECB to stick to monetary policy and avoid economic policy while, simultaneously, demanding the bank give more thought – at least in public – to the economic consequences of its actions.

As the dust settles, some in Germany welcome the ruling as pushback against EU institutions like the ECB, demanding they explain their actions better to member states – the bedrock of the EU.

Others worry such demands for transparency are at odds with the smoke-and-mirrors independence central banks require to be effective with financial markets.

Another camp fear that, by disagreeing with CJEU on bond-buying, Karlsruhe has, unwittingly, signalled to authoritarian governments and politicised courts – in Poland and elsewhere – that European court rulings are a pick and mix after all.

Another concern: though the Karlsruhe court insisted its ruling has nothing to do with the ECB’s current pandemic programme, the German judges appear to have set down criteria for Bundesbank participation in bond-buying, which the Covid-19 programme does not meet.

And yet, in this era of home-schooling, there is a benevolent way of looking at the homework Karlsruhe has set the ECB.

For years ECB officials have watched in frustrated silence as successive German governments took credit for the thriving economy and export market – without pointing out the key contribution of a stable single currency.

Occasionally a politician here points out how, without the euro, most Europeans could no longer afford German luxury kitchens and cars.

But most are silent, allowing the hijack of public debate in the last decade by voices framing the EU – and the euro in particular – as an expensive act of charity Germany can increasingly ill afford.

In hindsight, the Karlsruhe ruling may be viewed one day as the moment when the narrowing gap finally closed between Germany’s conservative fiscal hawks and nationalist, far-righters who see ECB bond-buying – like the single currency – as all cost and no benefit.

Or it may be the moment the ECB began to fight back, using Karlsruhe’s invitation to explain how its decisions weigh up the concerns of the German saver just as much as the needs of the Greek taverna owner.

Done right, Frankfurt’s response to Karlsruhe could even shame silent Berlin politicians into being more vocal salespeople for a currency of which Germany is the prime beneficiary.

Derek Scally is Berlin correspondent